Johnson Controls Hopes To Shake Global Growth Concerns In Earnings

Johnson Controls (NYSE:JCI) is expected to announce its Q3 earnings on coming Thursday, July 19th 2012. The company anticipates 20% growth in its earnings per diluted share on a year-over-year basis. ^[1] However, we believe this might be hard to reach given the current uncertain macro-economic environment particularly and the slowdown in European economic growth that is impacting sales in the automotive interiors business division of the company. Also, the company reported a mere 4% yearly growth in its earnings per diluted share, in its previous quarter earnings.

On the whole, we expect moderate growth in net sales and operating profit for the company driven by continued expansion in fast-growing economies of Asia, which will be partially offset by the slowdown in Europe. We have a price estimate of $33.50 which is about 30% ahead of the market price.

See our full analysis of the Johnson Controls stock here

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Slowdown in European economic growth

Europe accounts for nearly 50% of net sales in the automotive interiors business division of Johnson Controls, and the division constitutes approximately 38% of the overall company value. Thus, a slowdown in sales in Europe for the division is bound to significantly impact sales growth for the company.

The phenomena was evident in its previous quarter earnings where sales in Europe in the automotive interiors division grew by a mere 4% in comparison to nearly 11% sales growth in rest of the world, on a year-over-year basis. We anticipate the trend to continue in the upcoming earnings report.

Asia driving growth

On the positive side, Johnson Controls’ continued expansion in Asia is yielding dividends. The region is driving growth in sales and operating profit and occupying an increasingly larger portion of the overall company value.

In the building efficiency division, sales in Asia grew by 10% in the previous quarter, on a yearly basis. In comparison, sales in rest of the world for the division remained flat. The division primarily provides systems and services in heating, ventilation and air-conditioning, and refrigeration systems.

In the automotive interiors division, sales from Asia accounted for 13% of the overall division sales in the previous quarter. However, the corresponding percentage for operating profit stood at nearly 35%, indicating much higher margins than rest of the world. The division manufactures interior systems including seating, cockpit and door systems, and floor consoles for automobiles.

Overall, we anticipate these trends to continue in the upcoming earnings report with moderate overall growth in sales and operating profit for the company driven by continued expansion in fast-growing economies of Asia and partially offset by economic slowdown in Europe.

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1. Q2 10-Q filing for fiscal year 2012, www.sec.gov [↩]